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Key indicators for long-term property success – what to focus on · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:13
  Speaker 1: Stuart Weems, sitting in for your usual host, James Kirby.
• 0:16
  Speaker 1: I'm a property-friendly financial advisor and host of my own podcast, Investopoly.
• 0:21
  Speaker 1: The daily news is always full of commentary about the
• 0:24
  Speaker 1: direction of property prices. This includes commentary about interest rates,
• 0:28
  Speaker 1: population growth, unemployment, lending volumes, and the list goes on.
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  Speaker 1: Everyone's got an opinion to share, of course. What I'd
• 0:36
  Speaker 1: like to get to the should long-term property investors focus on. Now,
• 0:43
  Speaker 1: I've been following property really closely for more than two decades.
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  Speaker 1: So what I'm going to do is I'm going to
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  Speaker 1: share which elements I think are key to sort of
• 0:51
  Speaker 1: focus on. And then I'm going to invite my guest
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  Speaker 1: today to not only share his thoughts, but also critique
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  Speaker 1: what I've outlined.
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  Speaker 2: So here goes.
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  Speaker 1: Of course, we start with overall economic health. I think
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  Speaker 1: it's super important because that gives us the backdrop for
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  Speaker 1: property prices to potentially grow. things like the unemployment rate,
• 1:09
  Speaker 1: GDP growth, population growth, and so on. But let's be real,
• 1:14
  Speaker 1: Australia hasn't had a recession for more than three decades,
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  Speaker 1: so we might take that one for granted. And then
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  Speaker 1: there's three other factors that I think are really important
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  Speaker 1: to focus on. The first one is interstate migration. Now,
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  Speaker 1: overseas immigration tends to be relatively stable in terms of
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  Speaker 1: where it goes, which states it goes to. However, interstate
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  Speaker 1: migration can be a really good proxy for for property
• 1:38
  Speaker 1: owner sentiment. So a good example of this was that
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  Speaker 1: interstate migration was negative in Perth for a long time,
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  Speaker 1: and around 2020 and 21 it started to turn positive,
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  Speaker 1: and we know what's happened to property price growth since.
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  Speaker 1: Same with Brisbane, about 2017, 18, same thing happened there.
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  Speaker 1: The next one is interest rates and lending policy, but
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  Speaker 1: I think lending policy is more important than interest rate settings. 80%
• 2:04
  Speaker 1: of property in Australia is bought with a mortgage, And
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  Speaker 1: lending policy tells us which buyers will be most active
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  Speaker 1: and where. And lastly, housing supply. Now, of course, it's
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  Speaker 1: really tough to dramatically change housing supply in any particular location,
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  Speaker 1: and it's very expensive to do so. So if we're
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  Speaker 1: investing in established locations, really all we're worried about then
• 2:26
  Speaker 1: is change in density, and that can come down to
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  Speaker 1: apartment supply and then planning restrictions. Of course, I'm not
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  Speaker 1: an economist, so I invited the perfect guest on today's
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  Speaker 1: show to tell you if I'm crazy or not. He's
• 2:38
  Speaker 1: worked at Macquarie Bank, Federal Treasury, the OECD. He's the
• 2:43
  Speaker 1: chief economist at Australian ETF behemoth BetaShares. He's been on
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  Speaker 1: the show previously. Welcome back, David Bassanese.
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  Speaker 3: Great to be with you, Stuart. And yeah, I'm looking
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  Speaker 3: forward to the discussion today.
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  Speaker 2: Excellent.
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  Speaker 1: Dave, let's start with the big picture then. If I'm
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  Speaker 1: planning to invest in property in an established suburb in
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  Speaker 1: a major capital city, What do you think are the
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  Speaker 1: two or three most important macroeconomic factors that I need
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  Speaker 1: to pay attention to?
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  Speaker 2: Well, I mean, I think you have covered them.
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  Speaker 3: I mean, in terms of interest rates, the economy, I mean,
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  Speaker 3: and you can summarise all of this into housing affordability.
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  Speaker 3: I mean, there are various economists out there have these measures.
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  Speaker 2: I have one myself.
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  Speaker 3: And you can actually sort of broadly estimate, I'm talking
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  Speaker 3: nationally here, you know, how high house prices are relative
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  Speaker 3: to income, given the prevailing level of interest rates. And
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  Speaker 3: when that gets to a very high level, when affordability
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  Speaker 3: generally is very poor, then it's hard for house prices
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  Speaker 3: to grow strongly. And, you know, after a major boom
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  Speaker 3: in house prices, they tend to get expensive. And you think,
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  Speaker 3: you know, from a macro national wide perspective, at least,
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  Speaker 3: you're going to be struggling to get further strong gains.
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  Speaker 3: So that's, you know, like anything, you know, buying at
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  Speaker 3: the right time of the cycle, buying when house prices
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  Speaker 3: are relatively cheap is going to give you a better return,
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  Speaker 3: at least in the shorter run, depending on your time period.
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  Speaker 3: Obviously matters less if it's a long-term holding over, you know, 30,
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  Speaker 3: 40 years and you're just getting set forever. But interest rates,
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  Speaker 3: the economy, then I guess at the particular suburbs, The
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  Speaker 3: economic prospects in that suburb supply probably even more important
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  Speaker 3: because people can move around in terms of where they work.
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  Speaker 3: But what is important is how many houses or how
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  Speaker 3: many units are able to be built in that suburb.
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  Speaker 3: And that's where it does get a little bit funny
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  Speaker 3: because people want housing affordability. People, you know, at the moment,
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  Speaker 3: the political discussion is all about improving housing affordability. And
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  Speaker 3: one way to do that is to improve supply, to
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  Speaker 3: improve the density of how many houses we can cram
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  Speaker 3: into a certain area, which is great if you want
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  Speaker 3: to get into the market, not so great if you're
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  Speaker 3: looking to move into that suburb and invest and then
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  Speaker 3: worry about, you know, all the influx of supply because
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  Speaker 3: that'll depress your return going forward.
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  Speaker 2: You know, it really depends whether you're a buyer or
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  Speaker 2: seller in that regard.
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  Speaker 1: And of course, we see property markets behaving quite differently
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  Speaker 1: across Australia. You've got Brisbane, Perth and Adelaide that are,
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  Speaker 1: you know, recorded double digit property growth Sydney about 5%
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  Speaker 1: and Melbourne sort of slightly in decline. But of course,
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  Speaker 1: we have the same interest rate settings, you know, that
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  Speaker 1: they're obviously federal. What do you think is driving the
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  Speaker 1: disparity in growth between those markets?
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  Speaker 2: Firstly, the affordability.
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  Speaker 3: I mean, when Sydney and Melbourne, for example, particularly Sydney
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  Speaker 3: gets very expensive relative to other capital cities, you tend
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  Speaker 3: to see, you know, some people leaving Sydney, selling up
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  Speaker 3: and moving to cheaper cities. You see investors looking for
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  Speaker 3: better value elsewhere. So you tend to get a sort
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  Speaker 3: of realignment of valuations if they get too far out
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  Speaker 3: of line. So there is that general cycle, but also
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  Speaker 3: depends on what is driving the economy at the time.
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  Speaker 3: For example, if we're in a major mining boom, as
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  Speaker 3: we were a decade or so ago, Perth properties went
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  Speaker 3: through the roof. Everybody wanted to move to Perth to
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  Speaker 3: be part of the mining boom. And there was a
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  Speaker 3: brief period, I think it was around 2016, where the
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  Speaker 3: median price of a Perth property was higher than in Sydney.
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  Speaker 3: And then Perth, the mining boom ended and Perth went
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  Speaker 3: through years of slumber where house prices went nowhere for
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  Speaker 3: a while and relative value had to be restored in
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  Speaker 3: that market. So there are state differences in economic performance
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  Speaker 3: depending on what sectors are driving growth at the time,
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  Speaker 3: mining boom being.
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  Speaker 2: One, tourism, is another one.
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  Speaker 3: So when tourism is strong, it tends to favour the
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  Speaker 3: New South Wales, the East Coast markets relative to the
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  Speaker 3: other markets. I actually come from Adelaide originally, so I'm
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  Speaker 3: a little bit familiar with the Adelaide market and Adelaide
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  Speaker 3: has gone nowhere for a long time. Adelaide is one
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  Speaker 3: of those markets where there is supply ample, well, I
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  Speaker 3: wouldn't say ample, but greater supply capacity as they move,
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  Speaker 3: you know, build out into the suburbs. And so that's
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  Speaker 3: tended to hold back prices for a while. And also people,
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  Speaker 3: you know, generally leave Adelaide. So they don't get a
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  Speaker 3: lot of internal international migration. And many people, you know,
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  Speaker 3: have tended to leave Adelaide to see work opportunities elsewhere.
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  Speaker 3: So it hasn't had the population growth to drive prices
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  Speaker 3: for a while. But, you know, if it's got cheap
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  Speaker 3: enough that people have come back or at least not
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  Speaker 3: have left and it's going through a bit of a,
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  Speaker 3: you know, a renaissance at the moment.
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  Speaker 1: Yeah, not so cheap anymore. But if you talk about
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  Speaker 1: relative value to Sydney, Melbourne's never been cheaper relative to Sydney.
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  Speaker 1: Do you think Melbourne's due for a bit of a resurgence?
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  Speaker 1: And if so, what do you think might be the
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  Speaker 1: impetus for that? sort of to change in price direction?
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  Speaker 3: Yeah, look, again, look, another thing we haven't mentioned, another
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  Speaker 3: variable into the mix, if you like, is government policy. And,
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  Speaker 3: you know, I think in Melbourne's case, you know, they
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  Speaker 3: did impose, you know, more costs and taxation on investors
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  Speaker 3: in Melbourne, and that's tended to hurt the property market
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  Speaker 3: relative to other areas. Melbourne obviously was hurt pretty well.
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  Speaker 3: It had a bigger period of lockdown, a bigger shock
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  Speaker 3: due to COVID, and I think Melbourne is slowly recovering
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  Speaker 3: from it. you know, for a while there, Melbourne was
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  Speaker 3: booming relative to Sydney and the median price in Melbourne
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  Speaker 3: almost got as high as Sydney. But then, you know,
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  Speaker 3: COVID's come along, there's been some changes in government policy
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  Speaker 3: and it's sort of, you know, taken a, you know,
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  Speaker 3: relatively speaking, it has softened up.
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  Speaker 1: Yeah, it's a good segue to talk about sort of
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  Speaker 1: property forecasting because, you know, we just think back to
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  Speaker 1: that sort of COVID period, all the major banks were
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  Speaker 1: forecasting a 20% drop in prices. And our friend Christopher
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  Speaker 1: Joy jumped on that bandwagon as well. With that, he's
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  Speaker 1: sort of forecast around property price changes. Now, my view
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  Speaker 1: around this is the behavioural economic side of things haven't really,
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  Speaker 1: I mean, you can build a model around property prices,
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  Speaker 1: but it doesn't factor in the behavioural economic factors. And
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  Speaker 1: of course, two thirds of property buyers are own occupiers
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  Speaker 1: and own occupiers will go to great lengths to obviously
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  Speaker 1: not have to sell their home. So for a 20%
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  Speaker 1: price drop, we've got to see probably more sellers than
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  Speaker 1: there are buyers. And how's that going to occur? So
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  Speaker 1: do you have a view on this in terms of
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  Speaker 1: property forecasts and how difficult I guess it is to
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  Speaker 1: forecast property prices in the shorter term?
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  Speaker 3: Well, I mean, I think property forecasts in turn come
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  Speaker 3: down to economic forecasts. And I think a lot of
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  Speaker 3: the forecasts for those big house price declines during COVID
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  Speaker 3: are is that we thought we would go into a
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  Speaker 3: wrenching recession. You know, we were facing lockdowns, we were
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  Speaker 3: facing many people losing their jobs. And I guess the
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  Speaker 3: concern was that people would lose their jobs and be
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  Speaker 3: forced to sell their homes. But what we saw, two
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  Speaker 3: things happened. A, we didn't get the big increase in unemployment.
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  Speaker 3: We did get an increase for a while, but many
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  Speaker 3: people were kept in their jobs through the work support
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  Speaker 3: program from.
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  Speaker 2: The federal government. government. And also, importantly, we kind of
• 10:02
  Speaker 2: had a Team Australia.
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  Speaker 3: It was being called Team Australia, if anyone remembers that term,
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  Speaker 3: where everybody sort of pitched in and helped each other out.
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  Speaker 3: And banks, I think, were under a moral pressure, I think,
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  Speaker 3: not to force people into selling their home, even if
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  Speaker 3: they were struggling due to COVID. It was a combination
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  Speaker 3: of things. Unemployment didn't go as high as we feared.
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  Speaker 3: And those that did lose their jobs were given support
• 10:26
  Speaker 3: from the government. And banks didn't foreclose on properties to
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  Speaker 3: the extent that many feared as well. We got through
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  Speaker 3: that period. Look, house prices did decline. I think nationally,
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  Speaker 3: In Sydney, at least, they were down 10% or so
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  Speaker 3: at one point, even with the RBA cutting interest rates.
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  Speaker 3: But thereafter, the economy stabilised. And then obviously the immigration,
• 10:48
  Speaker 3: and one of the factors there is immigration dried up.
• 10:50
  Speaker 3: So that source of demand went away. But then obviously
• 10:53
  Speaker 3: with COVID recovering and we reopened the borders and immigration
• 10:57
  Speaker 3: surged back, interest rates were for a time very low.
• 11:00
  Speaker 3: So affordability was looking good and house prices recovered. So
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  Speaker 3: just to summarise, really, I think, I guess the overly
• 11:07
  Speaker 3: pessimistic housing forecast during COVID really came down to an
• 11:11
  Speaker 3: overly pessimistic view of the economy. And the economy actually,
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  Speaker 3: you know, we got through that better than feared because
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  Speaker 3: of A, government support and B, you know, banks holding
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  Speaker 3: back from forcing foreclosure. You know, people were able to
• 11:25
  Speaker 3: renegotiate their loans for a time and these sort of things.
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  Speaker 1: Yeah, they were even offering interest-only periods for people struggling
• 11:33
  Speaker 1: with repayments and so forth. So you're right. Probably more
• 11:38
  Speaker 1: useful for long-term investors is longer-term forecasts. Of course, they're
• 11:43
  Speaker 1: not very newsworthy because they're probably pretty boring. But if
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  Speaker 1: you were to forecast property prices longer term, say over
• 11:51
  Speaker 1: a decade period, Would it be true to say that
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  Speaker 1: you'd probably focus on more of those macroeconomic fundamentals rather
• 11:59
  Speaker 1: than the sort of geographical market factors? So it's really,
• 12:03
  Speaker 1: I guess, forming a view around the economic health of Australia?
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  Speaker 2: Yeah, look, it depends on how detailed you want to get.
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  Speaker 3: Like at a macro level, the key drives of house
• 12:13
  Speaker 3: prices are affordability. At the end of the day, house
• 12:16
  Speaker 3: prices can't rise by more than Assuming interest rates don't change,
• 12:20
  Speaker 3: assuming they stay the same over the next 20 years,
• 12:22
  Speaker 3: as an example, house prices can't rise more than household
• 12:26
  Speaker 3: income because you reach a certain point where you can't
• 12:29
  Speaker 3: afford to buy a house because the income you need
• 12:32
  Speaker 3: to devote to pay the mortgage is beyond people's capacity.
• 12:35
  Speaker 3: And on average, it's something like, if you look at
• 12:38
  Speaker 3: national affordability measures, something like 30, on average, something like 30%
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  Speaker 3: of after-tax family income devoted to a mortgage is sort
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  Speaker 3: of where the limits are. Once you get way beyond that,
• 12:50
  Speaker 3: house prices get too expensive and below that they get affordable.
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  Speaker 3: So the constraint ultimately is growth in the economy, growth
• 12:57
  Speaker 3: in incomes, which is something like probably 5% a year,
• 13:01
  Speaker 3: you know, over the long run. Now, we've had up
• 13:04
  Speaker 3: until last few years, we have had a period, you know,
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  Speaker 3: two decades.
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  Speaker 2: Of a trend decline in interest rates.
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  Speaker 3: And this is where, you know, many investors have got
• 13:12
  Speaker 3: to be careful because that's not going to be repeated.
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  Speaker 3: You know, we had double digit interest rates in the
• 13:17
  Speaker 3: late 1980s, back when we had high inflation. Then interest
• 13:21
  Speaker 3: rates have basically been trending down for, you know, two decades,
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  Speaker 3: which meant that, you know, house prices could rise faster
• 13:29
  Speaker 3: than household income. But that's something that can't be repeated.
• 13:33
  Speaker 3: Your house interest rates aren't going to continue to trend
• 13:35
  Speaker 3: lower because they're already, you know, relatively low. Another example of,
• 13:39
  Speaker 3: you know, past performance is not an indicator of future
• 13:42
  Speaker 3: performance there. But I think, you know, a reasonable expectation
• 13:45
  Speaker 3: is that broadly speaking, you know, house prices are going
• 13:48
  Speaker 3: to match growth in nationally, growth in household incomes, which
• 13:52
  Speaker 3: is going to be something like, you know, wages growth,
• 13:55
  Speaker 3: and I think four to 5% on average. Now, if
• 13:57
  Speaker 3: you want to dig deeper, you can look at booming areas,
• 14:01
  Speaker 3: you know, one of the big questions in Australia have
• 14:03
  Speaker 3: been the tree change Although, well, there's things going on,
• 14:06
  Speaker 3: people moving to cheaper regional areas as they retire. We've
• 14:10
  Speaker 3: seen booming regional areas, but also generally a move from,
• 14:14
  Speaker 3: you know, rural to urban.
• 14:15
  Speaker 2: That has been a trend.
• 14:16
  Speaker 3: You know, urban property is generally done better than regional property,
• 14:20
  Speaker 3: generally speaking, because of that movement of people, you.
• 14:24
  Speaker 2: Know, away from the bush movement. toward the cities. Now,
• 14:27
  Speaker 2: can that be reversed?
• 14:28
  Speaker 3: Maybe that can be reversed with government policy. It's certainly
• 14:31
  Speaker 3: cheaper to live outside of the major capital cities. But
• 14:34
  Speaker 3: at the moment, this is where all the jobs and
• 14:35
  Speaker 3: the activity is. And that's why there's been that trend
• 14:38
  Speaker 3: toward the major capital cities rather than the regional areas.
• 14:42
  Speaker 1: Yeah, I've spoken a lot about trying to invest in
• 14:45
  Speaker 1: locations that aren't necessarily tied to household income, that there's
• 14:49
  Speaker 1: other sources of wealth to sort of fuel property price growth. Anyway,
• 14:53
  Speaker 1: that's really interesting. We're going to take a short break,
• 14:55
  Speaker 1: and when we come back, I'm going to ask Dave
• 14:57
  Speaker 1: about housing supply and demand. Back with you in a moment. Hello,
• 15:09
  Speaker 1: and welcome back to the Australian's Money Puzzle Podcast. I'm
• 15:11
  Speaker 1: Stuart Weems, and I'm talking to David Bassanese, Chief Economist
• 15:15
  Speaker 1: of BetaShares. Dave, let's talk about housing supply now, because
• 15:19
  Speaker 1: obviously we can talk about demand, which you talked about
• 15:22
  Speaker 1: housing affordability is a big driver, I guess, of demand.
• 15:26
  Speaker 1: But if we talk about supply, of course, the Australian
• 15:29
  Speaker 1: government's had an ambitious target of a million more homes
• 15:33
  Speaker 1: over the next five years. How successful do you think
• 15:37
  Speaker 1: the government's going to be around housing supply? And I'll
• 15:42
  Speaker 1: say that, you know, over the last 20 years, almost
• 15:45
  Speaker 1: every single year I've read a report to say that
• 15:48
  Speaker 1: concludes Australia's not building enough houses. We've got a supply shortage. However,
• 15:53
  Speaker 1: you don't see too many homeless people. And, you know,
• 15:56
  Speaker 1: I mean, there's a bit of a rental crisis going
• 15:59
  Speaker 1: on in terms of occupancy, but that's driven by something different.
• 16:03
  Speaker 1: So I'm really interested to know how much weight should
• 16:06
  Speaker 1: we be putting on these sort of projections? And what
• 16:08
  Speaker 1: do you think you How sensitive is housing supply to
• 16:11
  Speaker 1: government policy?
• 16:13
  Speaker 3: Yeah, there's a lot to unpack there. Look, I think,
• 16:18
  Speaker 3: to think about the housing market, there's two types. I mean,
• 16:20
  Speaker 3: in Australia, it is true that supply is relatively constrained.
• 16:24
  Speaker 2: I mean, if you think about Sydney, I mean.
• 16:26
  Speaker 3: You can't build further out to east in Sydney because
• 16:29
  Speaker 3: it's right on the coast, right?
• 16:31
  Speaker 2: Half is, you know, there's water.
• 16:32
  Speaker 3: And then you can only build out west and then
• 16:35
  Speaker 3: you hit the ranges and the hills.
• 16:36
  Speaker 2: So we are sort of constrained.
• 16:38
  Speaker 3: And so within that area, you know, it comes down to,
• 16:41
  Speaker 3: you know, can you build high rise apartment blocks to
• 16:44
  Speaker 3: increase supply? But there's been a lot of, you know,
• 16:47
  Speaker 3: I guess nimbyism in that sense that there's been a,
• 16:50
  Speaker 3: you know, and quite, you know, I'm not against that.
• 16:53
  Speaker 3: I mean, if you live in a nice traditional suburb
• 16:55
  Speaker 3: and you've got single storey homes, you know, you don't
• 16:58
  Speaker 3: want 20 storey tower blocks being built left, right and centre.
• 17:00
  Speaker 2: So I'm certainly sympathetic to that.
• 17:02
  Speaker 3: The problem in Australia, just to take it to its
• 17:06
  Speaker 3: basic point, is that we are very urbanized. We talk
• 17:09
  Speaker 3: about Australia being a large country and a small population,
• 17:12
  Speaker 3: but all of our population is squeezed along the East
• 17:16
  Speaker 3: Coast and the handful of major cities along the coast.
• 17:19
  Speaker 3: And the rest of the country is pretty barren. So
• 17:22
  Speaker 3: we are very urbanized. A very high proportion of our
• 17:26
  Speaker 3: population live in very urban areas. Plus, we have low
• 17:32
  Speaker 3: regulations against high-rise apartment blocks. So if you go to
• 17:35
  Speaker 3: South Korea, for example, flying to Seoul, you'll see high-rise
• 17:39
  Speaker 3: apartment blocks as far as the eye can see. That's
• 17:42
  Speaker 3: how everybody lives. And that's why they can have millions
• 17:45
  Speaker 3: of people living in a city. And it's affordable. So
• 17:48
  Speaker 3: do we want to be like that? Maybe not.
• 17:50
  Speaker 2: So what is the solution here?
• 17:52
  Speaker 3: The solution is either, you know, you either build up
• 17:55
  Speaker 3: and have people living in the cities or you build
• 17:58
  Speaker 3: out and let them live in the outer suburbs or
• 18:00
  Speaker 3: the regions but have very good transport networks into where
• 18:04
  Speaker 3: the jobs are in the cities, which we haven't really
• 18:07
  Speaker 3: done very well, or we put the, you know, encourage
• 18:10
  Speaker 3: jobs in the regions, you know. So there are various ways,
• 18:13
  Speaker 3: but we've never really done either of those successfully. So
• 18:16
  Speaker 3: at the end of the day, all the jobs, all
• 18:19
  Speaker 3: the activity is in the capital cities and So people
• 18:22
  Speaker 3: want to live near those capital cities. But we still
• 18:25
  Speaker 3: have the development constraints against, you know, high rise apartment
• 18:28
  Speaker 3: blocks as far as the eye can see. So land
• 18:31
  Speaker 3: becomes a premium. The price of land becomes a premium.
• 18:34
  Speaker 3: That's why house prices in Australia are relatively high as
• 18:38
  Speaker 3: a multiple of income compared to many other countries such
• 18:41
  Speaker 3: as the United States. And, you know, we can talk
• 18:44
  Speaker 3: about tax. We can talk about things to the, you know.
• 18:46
  Speaker 3: Whole bunch of people, you know, a whole bunch of
• 18:48
  Speaker 3: arguments for why house prices are high in Australia relative
• 18:51
  Speaker 3: to other countries.
• 18:52
  Speaker 2: But that is basically it.
• 18:53
  Speaker 3: It's not, it's, you know, taxation, capital gains, negative gearing,
• 18:57
  Speaker 3: all of these things, I think are sort of side
• 18:59
  Speaker 3: issues to the big issue of high urbanisation.
• 19:03
  Speaker 2: That's our choice.
• 19:04
  Speaker 3: But at the same time, then reluctance to become a
• 19:07
  Speaker 3: sort of South Korea in terms of high rise apartment blocks.
• 19:11
  Speaker 1: I mean, Victoria has a great reputation for building infrastructure
• 19:15
  Speaker 1: below budget and on time. Of course, I say that
• 19:18
  Speaker 1: tongue in cheek. So I agree, it's not something that's
• 19:21
  Speaker 1: going to be easy to solve. You need to be
• 19:23
  Speaker 1: able to, you know, if you're going to live 100km
• 19:25
  Speaker 1: away from a major capital city, if that's really serviced
• 19:29
  Speaker 1: really well, like it might be in other countries in
• 19:31
  Speaker 1: Western Europe and Japan and so forth, it can work.
• 19:34
  Speaker 1: But you're right, everyone needs to flock to the city.
• 19:37
  Speaker 1: Do you think either of those things are going to
• 19:38
  Speaker 1: change infrastructure or density over the next couple of decades?
• 19:43
  Speaker 1: Or do you think it'll just be more of the same?
• 19:46
  Speaker 1: And I'm asking the question because if I'm an investor
• 19:49
  Speaker 1: and I'm thinking, well, probably... prices how you know it's
• 19:51
  Speaker 1: a common question i get asked you know how long
• 19:54
  Speaker 1: can property prices continue to grow at the pace they
• 19:57
  Speaker 1: have over the last two or three decades mathematically, prices
• 20:01
  Speaker 1: just become unaffordable. But if you're investing in an area
• 20:06
  Speaker 1: that's highly desirable, that only the top 20% of the
• 20:09
  Speaker 1: population can afford to live in, well, then that price
• 20:13
  Speaker 1: growth isn't necessarily linked to household income. So do you
• 20:16
  Speaker 1: think that the problem will be solved? Because if it isn't,
• 20:19
  Speaker 1: then investing in the eastern suburbs in Sydney is still
• 20:22
  Speaker 1: a great idea.
• 20:24
  Speaker 3: Look, fundamentally, I think Australian housing is always going to
• 20:28
  Speaker 3: be at the, again, if you've got a, just to
• 20:31
  Speaker 3: think about economics 101 for a moment and think about markets,
• 20:35
  Speaker 3: if you have a supply constrained market, the price of
• 20:38
  Speaker 3: a product in that market is going to be based
• 20:40
  Speaker 3: on affordability. When there's a scarcity, people will pay up
• 20:44
  Speaker 3: to what they can afford to pay. And that's sort
• 20:46
  Speaker 3: of the way that the Australian market works at the moment.
• 20:49
  Speaker 3: People pay as much, you know, again, you get five
• 20:52
  Speaker 3: people turning up at an auction and They're going to
• 20:54
  Speaker 3: bid against each other and they'll pay up to the
• 20:56
  Speaker 3: last dollar that they can afford to pay. And that
• 20:58
  Speaker 3: ultimately is what is constraining the house price. But it
• 21:00
  Speaker 3: will go to that dollar. And going forward, it's always
• 21:04
  Speaker 3: going to be given the supply constraints at that uncomfortable,
• 21:08
  Speaker 3: affordable level for certainly people trying to get into the market.
• 21:12
  Speaker 3: I don't think that's going to, you know, it could change.
• 21:15
  Speaker 3: But look, the other side of it is On the
• 21:17
  Speaker 3: one hand, governments like to talk about housing affordability. On
• 21:21
  Speaker 3: the other hand, they don't want to see house prices
• 21:24
  Speaker 3: crash either. They don't want to have too much supply
• 21:26
  Speaker 3: that house prices weaken. I think John Howard, ex-Prime Minister,
• 21:30
  Speaker 3: famously said a few years ago, no one's ever complained
• 21:33
  Speaker 3: to him about their house price rising. There's two sides
• 21:37
  Speaker 3: of the coin here in terms of how this is dealt.
• 21:41
  Speaker 3: I personally would like to see more focus on encouraging
• 21:45
  Speaker 3: regional development, encouraging people to be able to live out
• 21:48
  Speaker 3: in country towns and maybe telecommute. That's the way of
• 21:52
  Speaker 3: the future without needing to turn nice inner city suburbs
• 21:57
  Speaker 3: into high-rise apartment wastelands. I'd like to preserve what we
• 22:03
  Speaker 3: have in the inner cities and try to encourage some
• 22:06
  Speaker 3: greater regional development and allow people not to have to
• 22:10
  Speaker 3: cram into the cities. But whether they do that What
• 22:13
  Speaker 3: we don't want to do, what politicians do coming up
• 22:16
  Speaker 3: to an election is they throw more money. Economists hate
• 22:19
  Speaker 3: this when they throw subsidies. Here's another first home buyer subsidy.
• 22:23
  Speaker 3: And we know what happens. All that does is all
• 22:25
  Speaker 3: the first home buyers turn up the auction and bid
• 22:27
  Speaker 3: away that to the seller. So the only person that
• 22:30
  Speaker 3: benefits is the person selling the house.
• 22:32
  Speaker 2: And it's very frustrating.
• 22:34
  Speaker 3: So those demand side affordability measures in a supply constrained market,
• 22:41
  Speaker 3: don't work because all they do is benefit the seller.
• 22:44
  Speaker 1: Yeah, 100%. If we talk about the sort of demand side,
• 22:48
  Speaker 1: the affordability side, some data that really struck me more
• 22:52
  Speaker 1: recently was released by CBA in its results announcement a
• 22:57
  Speaker 1: few weeks or months ago. And they reported that 75%
• 23:02
  Speaker 1: of borrowers that are borrowing for investment purposes had a
• 23:06
  Speaker 1: household income of more than $ 200, 000. I think that was 24%
• 23:12
  Speaker 1: had a household income of more than $ 500, 000. So really
• 23:17
  Speaker 1: it is, you know, if you don't have a high income,
• 23:19
  Speaker 1: because of the 3% interest rate buffer that they use
• 23:22
  Speaker 1: to test serviceability, you really just can't participate. And of course,
• 23:26
  Speaker 1: that just fuels wealth inequality, doesn't it? I mean, you know,
• 23:30
  Speaker 1: people with middle to lower income earners sort of get
• 23:32
  Speaker 1: locked out of the market. Now, APRA, the banking regulator,
• 23:36
  Speaker 1: will argue that, you know, that's just prudential regulation. We
• 23:39
  Speaker 1: want to have a healthy year. banking system and so forth.
• 23:42
  Speaker 1: But what should investors take away from that? What are
• 23:46
  Speaker 1: the long-term implications of the settings being so restrictive for
• 23:51
  Speaker 1: people on middle incomes that they're not able to get
• 23:54
  Speaker 1: into the property market or Take that next step up
• 23:57
  Speaker 1: the ladder.
• 23:58
  Speaker 3: Look, so in terms of, I mean, one of the
• 23:59
  Speaker 3: issues in Australia at the moment, of course, is that
• 24:02
  Speaker 3: if you're a high income earner, you know, your marginal
• 24:04
  Speaker 3: tax rate is 50%, right? If you run a company,
• 24:07
  Speaker 3: you know, a company, their tax rate is, you know, 25%.
• 24:10
  Speaker 3: So there's this massive gap. And also, you get a
• 24:13
  Speaker 3: capital gains tax discount if you own a property. So
• 24:17
  Speaker 3: one of the issues going on at the moment is
• 24:19
  Speaker 3: that widening gap between the corporate tax rate and the
• 24:23
  Speaker 3: high marginal tax rate for people on high income, PAYE,
• 24:27
  Speaker 3: income earners, is encouraging, yeah, at the margin, more property investment.
• 24:32
  Speaker 3: So more and more high income earners that are facing
• 24:35
  Speaker 3: a high marginal tax rate are encouraged to try to
• 24:39
  Speaker 3: reduce that tax burden through investing in property, through negative gearing. Now,
• 24:44
  Speaker 3: funnily enough, if we were able to change the policy
• 24:47
  Speaker 3: so that the marginal tax rate wasn't 50%, it was
• 24:50
  Speaker 3: maybe 30% or something, the incentive to negatively gear into
• 24:54
  Speaker 3: property would actually be less.
• 24:56
  Speaker 2: I think that's one point.
• 24:57
  Speaker 3: And what we've seen over the years is that more
• 24:59
  Speaker 3: and more people are now being pushed in that top
• 25:02
  Speaker 3: income tax bracket. Many people don't know this, in the
• 25:06
  Speaker 3: United States or Europe, To be in the top tax bracket,
• 25:10
  Speaker 3: your income needs to be like five, six times the
• 25:12
  Speaker 3: average income.
• 25:13
  Speaker 2: In Australia, it's two.
• 25:15
  Speaker 3: The top tax bracket in Australia cuts in at a
• 25:17
  Speaker 3: relatively low level. Anyway, so that's just one of the
• 25:21
  Speaker 3: extra things that I think driving the market. So in
• 25:24
  Speaker 3: terms of property investing, yeah, you are going to get
• 25:26
  Speaker 3: those on higher incomes that are more eagerly chasing those
• 25:30
  Speaker 3: properties because they have this tax burden that they're trying
• 25:32
  Speaker 3: to deal with.
• 25:34
  Speaker 2: Yeah, that's really good.
• 25:35
  Speaker 1: We're going to take another break. And when we come back,
• 25:37
  Speaker 1: I'm going to answer a question from Sam and also
• 25:41
  Speaker 1: take the opportunity to ask Dave about direction of interest rates.
• 25:44
  Speaker 1: Back with you in a moment. Hello and welcome back
• 25:52
  Speaker 1: to the Australian's Money Puzzle podcast.
• 25:54
  Speaker 2: I'm Stuart Williams.
• 25:55
  Speaker 1: I'm talking to David Bassanese, the Chief Economist at BetaShares. Now,
• 25:59
  Speaker 1: before we get into a listener question, Dave, I wanted
• 26:03
  Speaker 1: to ask you about, I couldn't help asking you about
• 26:05
  Speaker 1: the direction of interest rates. And I was interested to
• 26:08
  Speaker 1: see that both Coolabar Capital and Research Affiliates has done
• 26:11
  Speaker 1: some work on what happens when inflation rises significantly. And
• 26:18
  Speaker 1: they both concluded that quite often, more than 70% of
• 26:21
  Speaker 1: the time, inflation will initially come back and then it
• 26:24
  Speaker 1: will re-excelerate. And according to the RBA's own forecasts, inflation
• 26:30
  Speaker 1: won't hit the middle of the 2% to 3% band
• 26:32
  Speaker 1: until the start of 2026. So if the risk that
• 26:37
  Speaker 1: inflation becomes entrenched or that inflation re-excelerates, why wouldn't the
• 26:43
  Speaker 1: RBA hike interest rates now again to reduce that risk
• 26:48
  Speaker 1: if its own forecasts tell us that it won't be
• 26:52
  Speaker 1: in the middle point of the band for maybe 15
• 26:55
  Speaker 1: or so months?
• 26:57
  Speaker 3: Yeah, look, firstly, just on the idea that inflation re-accelerates,
• 27:00
  Speaker 3: I mean, one of the examples many people use, and
• 27:03
  Speaker 3: they look at the 1970s, you know, we had inflation
• 27:05
  Speaker 3: go up in the early 70s, it did come back,
• 27:08
  Speaker 3: and then it bounced back in the late 70s, early 80s. Now,
• 27:12
  Speaker 3: we had two oil price shocks. We had OPEC 1
• 27:14
  Speaker 3: in the early 70s, where oil prices, you know, surged,
• 27:17
  Speaker 3: and then they came back, and then we had, you know,
• 27:19
  Speaker 3: the oil price shock number two, you So that, you know,
• 27:23
  Speaker 3: I think that's one of the, I'm not convinced that
• 27:25
  Speaker 3: there's necessarily this cycle that if high inflation comes down
• 27:29
  Speaker 3: and then it bounces back.
• 27:31
  Speaker 2: I mean, I'm not convinced that is a given.
• 27:33
  Speaker 3: And certainly in today's world of, you know, high globalisation,
• 27:37
  Speaker 3: a lot of technology disruption, I think inflation is just
• 27:41
  Speaker 3: generally going to tend to be lower for longer. I
• 27:44
  Speaker 3: think COVID was a special case where we had massive
• 27:47
  Speaker 3: supply and demand disruptions which initially caused shortages and caused
• 27:53
  Speaker 3: prices to go up to clear markets. But prices have
• 27:57
  Speaker 3: been coming down and I think they will continue to
• 27:59
  Speaker 3: come down. Now, just in terms of the RBA, I mean,
• 28:02
  Speaker 3: the RBA has got a balancing act. You are absolutely
• 28:04
  Speaker 3: correct in that The thing about the longer inflation stays high,
• 28:09
  Speaker 3: the greater the risk that it gets entrenched into wage
• 28:12
  Speaker 3: and price setting behavior. We saw that in the 1970s.
• 28:15
  Speaker 3: And then it did take wrenching recessions in the early
• 28:19
  Speaker 3: 80s to actually finally break the back of that inflation.
• 28:21
  Speaker 3: So that is the challenge. You can't wait forever for
• 28:24
  Speaker 3: inflation to come back down again. But at the same
• 28:27
  Speaker 3: time is, you know, if you can get inflation into
• 28:30
  Speaker 3: the target band in the next six months, how do
• 28:32
  Speaker 3: you do that? Raise rates and cause a recession. So
• 28:36
  Speaker 3: you've got to find a middle ground somewhere there. And
• 28:38
  Speaker 3: that's where central banks around the world, including the RBA,
• 28:41
  Speaker 3: have been trying to find that middle ground. So the
• 28:44
  Speaker 3: RBA's judgment at the moment is, and I think correct,
• 28:48
  Speaker 3: inflation is coming down. I think various measures of underlying
• 28:51
  Speaker 3: inflation now around about 4%. A year or so ago,
• 28:54
  Speaker 3: they were over 6%. So it's come down. And I
• 28:57
  Speaker 3: think continuing to come down back toward that 3%. And
• 29:00
  Speaker 3: if you look at surveys of long-term inflation expectations... they
• 29:04
  Speaker 3: are still relatively well contained. So provided the RBA thinks
• 29:08
  Speaker 3: that inflation expectations are contained, provided it thinks that what
• 29:12
  Speaker 3: we're seeing isn't becoming embedded into wage and price sending behaviour,
• 29:16
  Speaker 3: then they can afford to wait a little bit and
• 29:18
  Speaker 3: not smash the economy.
• 29:20
  Speaker 2: Some people say, oh, we can't take that risk.
• 29:22
  Speaker 1: Well, you know.
• 29:24
  Speaker 3: It's worth taking the risk if it avoids a wrenching
• 29:26
  Speaker 3: recession where hundreds of thousands of people lose their job,
• 29:29
  Speaker 3: in my mind. And that's the sort of judgment we're
• 29:31
  Speaker 3: taking at the moment. And again, I go back to,
• 29:34
  Speaker 3: I think that due to globalization, due to competition in
• 29:39
  Speaker 3: markets being a lot tougher than it was 10, 20,
• 29:42
  Speaker 3: 30 years ago, the natural tendency is for inflation to ease.
• 29:46
  Speaker 2: And I think we will see that over the next
• 29:48
  Speaker 2: year or so.
• 29:50
  Speaker 1: And money markets are pricing in about a 1% drop.
• 29:53
  Speaker 1: the course of the 25 calendar year. Do you think
• 29:56
  Speaker 1: that seems reasonable? Do you think the money markets are
• 29:59
  Speaker 1: right in terms of pricing that in?
• 30:02
  Speaker 2: Yes, I do.
• 30:03
  Speaker 3: I've got the RBA cutting rates in February of 25.
• 30:06
  Speaker 3: And I think we're going to see, we need to
• 30:09
  Speaker 3: see inflation continuing to come down. Bottom line, at the moment,
• 30:12
  Speaker 3: inflation is still too high. So the underlying measure of
• 30:15
  Speaker 3: inflation in Australia, it's called the trim mean, for example,
• 30:18
  Speaker 3: the year on year rate is 3.8%. Now, by early
• 30:22
  Speaker 3: next year, and that's the June quarter measure, we get
• 30:26
  Speaker 3: two more quarterly CPI reports, the September quarter and the
• 30:29
  Speaker 3: December quarter. We get the December quarter one in late
• 30:32
  Speaker 3: January of 25. If that annual rate is down to
• 30:35
  Speaker 3: three and a half or even a bit below three
• 30:37
  Speaker 3: and a half, I think that's enough of progress on
• 30:40
  Speaker 3: inflation for the RBA to at least start to take
• 30:43
  Speaker 3: the foot off the brake. I mean, interest rates are
• 30:45
  Speaker 3: at restrictive levels in Australia. And so it's not about,
• 30:48
  Speaker 3: you know, stimulating the economy. It's just taking the foot
• 30:51
  Speaker 3: off the brake a little bit. And as inflation continues
• 30:54
  Speaker 3: to progressively come down, I think they'll then be able to,
• 30:59
  Speaker 3: you know, what we call renormalise rates is bring them
• 31:01
  Speaker 3: back to a more normal level, which is close to 3% than,
• 31:06
  Speaker 3: you know, the 4.35% that we have at the moment.
• 31:09
  Speaker 2: Yeah, excellent.
• 31:10
  Speaker 1: We're going to take a listener question now from Craig.
• 31:13
  Speaker 2: Craig writes.
• 31:14
  Speaker 1: My wife and I are in our early 30s, currently
• 31:18
  Speaker 1: expats in the US with the intention to return to
• 31:21
  Speaker 1: Australia in the coming years. I'm thinking it might be
• 31:23
  Speaker 1: a good time in our lives to engage a financial
• 31:26
  Speaker 1: planner for the first time to help setting things up
• 31:29
  Speaker 1: in terms of asset allocation now as we have a
• 31:33
  Speaker 1: host of new complexities to think about. My question is,
• 31:36
  Speaker 1: do people engage financial planners for this sort of one-off
• 31:39
  Speaker 1: piece of advice to set the strategy in the right place?
• 31:43
  Speaker 1: Any other insights you may have on the topic for
• 31:45
  Speaker 1: typical fees charged would be much appreciated. So Craig, James
• 31:50
  Speaker 1: had Jackie Clark on the show back in the start
• 31:53
  Speaker 1: of September, the 5th of September, and they talked about
• 31:56
  Speaker 1: how financial advisor numbers in Australia have halved over the
• 32:00
  Speaker 1: last five-ish years. So there's a sort of shortage of
• 32:03
  Speaker 1: supply of financial advisors, if you like, and that most
• 32:07
  Speaker 1: advisors only work with ongoing clients just because of resourcing issues, really.
• 32:13
  Speaker 1: and that the average fee starts, based on their research
• 32:16
  Speaker 1: they talked about in that podcast episode, around $ 5, 000 a year. Look,
• 32:22
  Speaker 1: I think it's probably worthwhile. There are some unique complexities
• 32:25
  Speaker 1: to expats returning to Australia, and property is a big
• 32:29
  Speaker 1: element as well. That is typically when to buy the
• 32:32
  Speaker 1: family home if you don't already have it, and how
• 32:35
  Speaker 1: much to spend, and how to make that not only
• 32:37
  Speaker 1: a good lifestyle decision, but also ultimately a good financial
• 32:41
  Speaker 1: one as well. So I think there's probably value in
• 32:43
  Speaker 1: making sure that you execute on those things correctly and
• 32:47
  Speaker 1: not make any mistakes. What could be challenging, however, is
• 32:50
  Speaker 1: to firstly find an advisor that has both that property
• 32:54
  Speaker 1: and shares and super expertise, but then also, most importantly,
• 32:59
  Speaker 1: finding an advisor that's going to give you that one-off advice.
• 33:03
  Speaker 1: Do you have anything to add, Dave?
• 33:05
  Speaker 2: No, I think that's pretty sensible.
• 33:07
  Speaker 3: I mean, if you can afford the financial advice, you know,
• 33:10
  Speaker 3: certainly it's always a good idea. I think financial advice,
• 33:14
  Speaker 3: you know, really does pay for itself. Certainly if you've
• 33:16
  Speaker 3: got a lot of assets and you can afford to,
• 33:18
  Speaker 3: you know, get the advice, it certainly makes sense. And
• 33:21
  Speaker 3: as I said, I think it doesn't necessarily, and the
• 33:23
  Speaker 3: idea of even just a one-off, you know, taking stock
• 33:27
  Speaker 3: of the situation as you come back, It is good.
• 33:30
  Speaker 3: I mean, they might offer you a more ongoing service.
• 33:33
  Speaker 3: It's really up to you whether you want to go
• 33:34
  Speaker 3: down that path as well. But yeah, certainly if you
• 33:37
  Speaker 3: can afford advice, it usually, I think it's certainly well
• 33:40
  Speaker 3: worth the investment.
• 33:42
  Speaker 1: Yeah, one of my mentors has told me many times, Stuart,
• 33:45
  Speaker 1: professional advice pays for itself, you know, whether it's legal advice,
• 33:49
  Speaker 1: financial advice, whatever it might be. Dave, that's been a
• 33:52
  Speaker 1: really interesting discussion. I'm sure our listeners have really enjoyed
• 33:55
  Speaker 1: it as well. I mean, there is, as I said
• 33:57
  Speaker 1: in the introduction, a lot of information forecasts and predictions
• 34:01
  Speaker 1: and opinions out there with respect to economic settings and
• 34:05
  Speaker 1: property price growth. And I think that helps our listeners
• 34:08
  Speaker 1: really understand and put a bit of context around it.
• 34:11
  Speaker 1: Just a reminder, folks, if you have any questions or feedback,
• 34:14
  Speaker 1: we'd love to hear from you. The email is themoneypuzzleattheaustralian.com.au.
• 34:20
  Speaker 1: Please keep those questions coming. James Gerrard will be back
• 34:23
  Speaker 1: with you on Thursday, and I'm sure you'll be relieved
• 34:25
  Speaker 1: to know that James Kirby will be back in this
• 34:27
  Speaker 1: seat this time next week. I really hope you've enjoyed
• 34:31
  Speaker 1: today's episode. Thanks very much, Dave.
• 34:34
  Speaker 2: No worries. Great to be with you all.
• 34:36
  Speaker 1: Thanks for having us. Bye for now.